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Eskom's $4.9 Billion Bailout in S. Africa Budget Sees Debt Jump

(Bloomberg) -- South Africa’s distressed utility that supplies 95 percent of its power will receive the biggest bailout in the nation’s history after the government stepped in to prevent its collapse.

Eskom Holdings SOC Ltd. will get a 69 billion-rand ($4.9 billion) cash injection over the next three years to help service its debt and free up cash for operations, Finance Minister Tito Mboweni said in his budget speech Wednesday to lawmakers in Cape Town. Part of the utility’s transmission business will also be sold to private investors and it will have to drastically reduce costs.

“Pouring money directly into Eskom in its current form is like pouring water into a sieve,” Mboweni said. “We are setting aside 23 billion rand a year to financially support Eskom during its reconfiguration.’’

While the Treasury estimates that Eskom needs about 150 billion rand of support over 10 years to plug a hole in its balance sheet, the size of the actual support beyond that outlined in the budget would depend on factors including economic growth and tariffs.

The plans to reorganize the company and increase renewable energy purchases from private producers put it on a collision course with labor unions concerned about potential job losses. That bodes ill for the ruling African National Congress, which is due to contest national elections on May 8 and is heavily reliant on its union allies to help it campaign.

‘Some Comfort’

The allocation in the budget led to the first breach of the government’s spending ceiling since it was introduced in 2012, and helped swell the budget deficit to 4.5 percent of gross domestic product, the widest in a decade. But the fact that the government didn’t take over Eskom’s debt -- as the company had requested -- may be a positive.

“The fears that some of Eskom debt would be transferred to the government’s balance sheet didn’t materialize,” Old Mutual Ltd. Chief Executive Peter Moyo said by phone. “That should give rating agencies some comfort.”

The rand and government bonds reversed an initial slump. The currency was 0.6 percent stronger at 13.9561 per dollar at 5:30 p.m. in Johannesburg after tumbling as much as 2.3 percent. The yield on the benchmark 2026 rand bond dropped 5 basis points.

Mismanagement Legacy

Eskom is saddled with 419 billion rand of debt and isn’t selling enough power to cover its interest payments and operating costs, a legacy of years of mismanagement and cost overruns on new plants. The government warned lawmakers last week that the utility “will cease to exist at current trajectory by April 2019.”

“It’s in the right direction, it covers about 65 to 75 percent of the debt-servicing costs,” Phakamani Hadebe, Eskom’s chief executive officer, said after the announcement. “So it releases resources to do maintenance and we will be in a better state than we are now.”

The utility also awaits a decision by the National Energy Regulator of South Africa on its application to raise tariffs by more than 15 percent annually for three years. That would ease liquidity concerns, although the regulator has been reluctant to give Eskom what it wants in the past, because of the impact on households. Allegations that billions of rand were siphoned out of the company through corruption adds to the reticence to help Eskom.

The cash for Eskom will come partly from reprioritizing and cutting other spending, including a reduction in the state’s salary bill, according to the budget review. Further assistance is also on condition that it cuts costs.

Must Repay

“I want to make it clear: the national government is not taking on Eskom’s debt,’’ Mboweni said. “Eskom took on the debt. It must ultimately repay it.’’

President Cyril Ramaphosa announced plans to split Eskom into generation, distribution and transmission businesses under a state holding company in his Feb. 7 State of the Nation address. That will enable each unit to manage its costs more effectively and make it easier for them to raise funding, he said.

The businesses will have their own boards, take over some of Eskom’s assets, liabilities and staff and have to produce financial statements, the National Treasury said in an annexure to the budget. The transmission company should be set up by mid-2019 and control the national grid, power substations, and the gas turbines, hydro and pumped storage facilities that supplement the electricity supply during peak times, it said.

“We expected a bailout of this size, as it is just enough (R23 billion) to keep Eskom solvent on a year-on-year basis,” Darias Jonker, Africa director at Eurasia Group, said by email. “But Eskom will need to find other sources of financing too and is likely to include international capital markets in this regard.”

The Treasury outlined several other reasons for splitting up Eskom, including:

Reducing the opportunity for fraud and corruption.

Mitigating the risk that Eskom is too big to fail and limiting the financial contagion from its underperforming generation business.

Diversifying power generation by encouraging private investment and reducing the nation’s reliance on a single electricity supplier.

Providing open access to the grid and removing conflicts of interest that arise from buying power from independent suppliers.